Magazine

GM: All Its Eggs In One Astra?

March 14, 2004

General Motors Corp. (GM) Vice-Chairman Robert A. Lutz took the stage at the Geneva Auto Show on Mar. 2 and gleefully crowed about the "very fast start" of the new Opel Astra, the flagship of Adam Opel, GM's main operation in Europe. GM's stylish compact hasn't even arrived at dealerships, but already Opel has drummed up firm orders for 30,000 of the cars in two months. Even better for Opel, the new Astra's racy design and lush interior have prompted glowing reviews in trade magazines. Even rival execs give it an approving nod. "It's a beautiful car," says Toyota (TM) Europe Senior Managing Director Tokuichi Uranishi.

The new Astra could be just what GM Europe needs to juice sales, emerge from a five-year slump, and accelerate the earnings recovery of its giant parent in Detroit. The timing is lucky: The Astra is hitting the market just when its biggest rival, Volkswagen, is reeling from the weak launch of its vital profit spinner, the Golf compact. Astra's classy design has helped galvanize the sense of new beginnings in an Opel lineup long distinguished by its mediocrity. Its high-tech headlamps are framed dramatically in a black-glass setting, "like presenting jewelry in a special case," says Astra designer Friedhelm Engler. The ambitious team that designed the Astra, all younger than the 40-year-old design chief, wanted to push Astra's styling to the edge. "We didn't play the safe card. It gives us a clear advantage," says Engler.

The Astra must deliver more than just looks, though. A lot is riding on the success of the car, which is priced at 13,800 euros ($17,250), 2000 euros below the new Golf, and starts arriving in dealer showrooms on Mar. 19. Its projected annual sales -- after the full rollout -- of 500,000 are one-third of Opel's volume. GM's three-year turnaround effort in Europe is slowly bringing results. But GM Europe needs a shot in the arm to restore its health completely. The $34 billion unit lost $2.3 billion from 2000 to 2003, and almost $3 billion if restructuring charges are thrown in. Just breaking even would help GM hit this year's target of expanding global earnings to $3.8 billion, from $3.2 billion in 2003. To stop GM Europe's losses, the company has cut 15,000 jobs since 2000, whacked plant capacity by 29%, and improved quality.

Plenty of previous GM turnarounds in Europe have foundered. But this time Lutz himself, one of the wonder execs of Motown, is playing a key role. On Mar. 1, he took over as chairman of GM Europe and will run the business until GM Asia Pacific President Frederick A. Henderson takes the job on June 1.

A SHARP EYE ON DESIGN. Even when Henderson steps in, Lutz will be keeping a sharp eye on the Continent. Last fall he joined the board of Adam Opel with the aim of getting more involved in product design. Since taking over GM's product-development works in August, 2001, he has been combing through GM's global lineup to find vehicles, engines, and platforms that can be used in different markets to boost efficiencies and save billions. In the past, Opel was responsible for making small cars for emerging markets. Under Lutz, GM's Asian partners Suzuki (SZKMF) and Daewoo are taking more of those emerging-market responsibilities, freeing Opel's engineers to concentrate on their home turf. Daewoo also will supply low-priced entry-level cars for Europe, allowing Opel to move upmarket.

Opel Chairman Carl-Peter Forster, a respected former BMW executive who took up his post three years ago, says new cars like the Astra and continued cost-cutting could help Opel break even or possibly make $100 million this year. But a weak German economy and a looming price battle could make it hard for Opel to produce stellar profits on the Astra. Analysts are skeptical, with some predicting a $130 million loss this year from GM Europe, which includes Saab.

If the Astra isn't a hit, GM could be looking at more production cuts in Europe, says Mark Fulthorpe, director of European forecasting at auto-industry consultant CSM Worldwide. Making matters worse, Asian carmakers such as Toyota, Nissan (NSANY), and Hyundai are making strong inroads. Meanwhile, luxury brands such as Volvo (F), BMW, and Audi have successfully expanded their model lineup to smaller cars to steal buyers from mass-market producers such as Ford Motor Co. (F) and Opel. Since 2000, Opel and its British sister brand Vauxhall have watched market share in Western Europe fall to 9.2% from 10.5%.

GM may be able to reverse the slide with Astra. Forster packed the car with technology normally found in more upscale models, like a new, electronically controlled chassis system to improve handling and braking. The headlights can "curve" around a bend when the car detects a turn, and sensors in the tires automatically warn if tires are getting low. "We hit the heart of the market in terms of value, with equipment, design, and affordability," says Astra chief engineer Jon J. Lauckner. And J.D. Power & Associates Inc. reports that Opel's quality has been improving faster than that of any other car company in Europe. Says Mark Fields, CEO of Ford Motor Co.'s Premier Automotive Group and former CEO of Mazda: "Opel has made a big step forward in craftsmanship with the Astra."

The battle for the heart and soul of the compact market only gets tougher, though. Renault, Peugeot, Ford, and Fiat are coming on strong with new models. When VW's new Golf failed to meet sales targets, it offered a $1,466 air conditioner for free. Opel meanwhile offered up to $1,222 in free options until the car hit the showrooms. And the new Astra will cost roughly 4% less than a similarly equipped model of the previous generation. "If GM brings its incentive dollars to Europe to back the Astra, we are in danger of a tit-for-tat," Fulthorpe says. "Then the rest of the industry [has] to get involved."

At least Volkswagen has created an opening for Astra to woo the Golf's traditional buyers. VW packed expensive engineering into the Golf in an effort to boost the car's premium image and margins, charging a lofty base price of 16,000 euros ($20,000). Customers balked, and 2003 sales of the new Golf came in 20% lower than expectations.

To capitalize on VW's mistake, Opel has to match its good looks with handling pizzazz and reliability. "Styling is just one factor. What about performance, comfort, and quality?" asks Toyota's Uranishi. That's the competition Astra still needs to sweep. By Gail Edmondson in Geneva and David Welch in Detroit